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SaaS Churn: The Myths, Benchmarks, and Strategies to Increase Revenue

Apr 26, 2022

This week, I cancelled an annual SaaS subscription (I was left with three weeks until renewal).

It's interesting that, despite having paid for a year-long subscription however, the company wouldn't let me keep the last three weeks ' access to premium features.

Once I had started canceling, a popup warned me that I'd immediately end my access to the paid features.

"This action will immediately downgrade your subscription. Do you really want to stay?"

I canceled anyway, knowing I didn't need the tool going forward. With the terminology of SaaS I turned on the engine. The experience made me thinking:

  • Was the immediate elimination of features that cost money is the best way to prevent me from churning?
  • Was it the day I was officially counted to be "churned"? Do they consider me to be"churned" the day after I decided to cancel? On the day my subscription was due to renew? Was it the case if I had downgraded, upgraded, or changed my subscription?
  • What would they have done differently to prevent me from canceling?

In this article this article, we give the best possible approach to answering these and many other questions surrounding churn.

In part one we will discuss benchmarks as well as common churn formulas.

In Part Two in this second installment, we'll discuss five churn-prevention strategies that have been successful in different SaaS businesses.

In the third part the final part, we'll provide some definitions that you could use to talk about churn with your colleagues along with some additional sources.

If you'd prefer using this table of contents to jump between sections of this article.

Table of Contents

Part I: SaaS Churn Benchmarks

If people in SaaS speak about churn we're not always doing an adequate job of making sure we're on the same page.

If someone claims they have a 5% churn rate, is it talking about quarterly, monthly or annual Churn?

Do they include clients who did not make it out of trials?

Are you able to compare the churn rate of a SaaS business that is targeting customers of enterprise against one that is selling to the general public?

In setting churn benchmarks for SaaS businesses, there's much to take into consideration. In this article, we dissect it into smaller pieces so that you can perform a comprehensive churn analysis of your own business and have a better idea of how you're doing.

Is There an Ideal Churn rate for SaaS?

I often hear that a 5% to 7% churn rate is optimal for SaaS companies. However, is it just anecdote? Is it common for SaaS firms to achieve this standard?

That is In other words, 5 to 7% could be an ideal range However, what's the median?

To investigate, Ryan Law, former CMO and cofounder at Cobloom, performed an examination of six recent churn report or studies and found that there's no consensus regarding the average churn rate for SaaS businesses. A majority of the studies that he examined showed an average annual churn rate of 10 percent. The other three showed more and a wider spectrum of 32% to 61% annual churn.

Why such a wide range? Ryan suggests that there's not enough data available to get a more accurate image of SaaS the churn rate because it's something most companies want to be very transparent about.

However, he also sees other elements that influence churn such as a company's size, and the sector it is in.

The Churn of a product can vary based on the industry.

Industries can have very different values for churn.

"Look at your personal technological stack and you'll see items you consider essential, and others deemed 'nice-to-have,'" Ryan writes. "It's likely that a financial or sales tool are more resistant to churn as compared to a marketing tool since it's believed as being more responsible in terms of the revenue."

He adds that niche tools with fewer competitors will also experience lesser the rate of churn.

Corporate Size Influences Common Churn Rates

Ryan points out that many of the most reputable SaaS companies target enterprise customers who have contracts with longer lengths which means their churn rate will be lower. The flipside is that SaaS companies targeting customers who are small or individuals with more customers and contract lengths that are shorter tend to have higher churn rates.

Although Ryan analyzes the typical rate of churn for large as well as small SaaS firms, what he's really saying is that your churn rate will vary based upon how big your customer and your average contract value. The lower the ACV greater the ease to make churn.

What is acceptable Churn?

Hotjar the founder David Darmanin understands that a the churn percentage doesn't really mean anything on its own. "Ultimately, churn and the amount of churn you have affects the size of your market and how fast you're bringing on potential customers" he explained on an episode of The ChurnFM show.

If your target market isn't large, then churn matters significantly more. But if your target market is relatively large, and you use a low-friction sales approach and you are able to withstand a higher churn rate without majorly affecting your company.

This realization led David to separate the churn process into two groups that are acceptable and alarming. Some churn is acceptable or even requiredin particular in the case of a traditional B2C sales model.

"Worrying churn is where you've found a perfect customerand they're now coming to the party, but the moment they quit using your product] or cease to pay for it," David said.

In other words, the amount of churn you receive will be an issue in the event that you're losing a substantial proportion of the ideal clients.

It could be beneficial to eliminate users who do not match your ideal profile of customers (ICP). It's not the kind of users that you'd like to be supporting or seeking feedback from.

There's a second distinction which is important to David What do customers think about the service after they exit?

"Ultimately, I think what is more significant on this kind of flywheel that you're developing (in the case of Hotjar) is that if customers are leaving or stopping because of a negative feeling it actually has an even greater impact than simply the fact that they stopped paying your. Because word-of-mouth for us is much greater energy than the money that we're collecting or churning or dropping or whatever."

This is where gathering feedback from customers that have already churned comes in (a issue we'll discuss further down).

What's the most efficient Churn Rate Formula?

To measure churn, the easiest churn rate calculation is the amount of churns during a given period divided by the number of clients at the beginning of a period.

The number of churns produced during a time
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The number of customers in the beginning of a period

For instance, if you're calculating monthly churn, starting with 1,000 customers, but lose 27 of them, the churn percentage for that month is 2.7 percent.

But this formula misses out on several vital aspects.

In particular, it does not include the number of brand new customers you acquired during that period as well as the percentage of them converted, in comparison to the number of your existing customers who churned.

The weighting is not based on expansion. If you're losing the same quantity of users every month, yet you manage to gain more clients than you lose, the churn rate is likely to decrease, but there's been little change in how customers behave.

If you apply this easy calculation to determine the monthly churn, you might not even realize that the rate at which you churn differ based on the number of days you have in the course of a month!

For these reasons, the basic churn rate formula doesn't give an exact picture of how theyou're increasing or losing. It's too easy.

When deciding how you're going to measure churn Outlier AI offers two suggestions:

  1. The formula that you pick for churn must be compatible to your main business goals. Choose the elements that are most important to you to track and then refine the formula to suit.
  2. Do not make the formula complicated. "The more complicated it gets, the more likely you'll make a mistake making a calculation at some point, and you'll have an inaccurate metric."

Business analysts have published their own churn formulas. Steven Noble's article regarding how Shopify measures churn is an essential read. Also, an Baremetrics article analyzes the churn rate of various types of customers for example, users upgrading or annual plan subscribers leaving.

Another thing to note: when you hear people speak about churn it's typically about the loss of customers. But there are other types of churn to measure, such as revenue and the transactional the churn. Look over Outlier AI's post to find out more information about these.

Monthly in comparison to. Annual Churn: Which One Should You Keep Track of?

There's a significant contrast between annual and monthly churn. If you are losing 7% of your customers who turn over throughout the year this is a distinct number from losing 7percent of your clients every month.

It's not necessarily a bad idea to measure both of them, your monthly churn rate is likely to be significantly smaller than your annual churn.

What is Negative Churn?

In order to understand the full picture of the churn rate, don't only look at the amount of customers are you losing. This includes the behaviors of your returning customers, as well.

That's when negative churn is a factor.

I've heard people ask whether negative churn really is a myth. Actually, it's not. However, it might not be the way you imagine it to be.

Negative churn is when the profits from upsells and cross-sells exceeds the revenue lost from customers that have been churned for a long duration of.

When you've reached this point, you could lose customers without new customer acquisition and still increase your revenue (at minimum for a short time).

According to the VC Tomasz Tunguz that achieving zero churn is an objective.

"Combined in conjunction with the annual payment agreements Negative churn can be an effective growth strategy," Tomasz writes. "When considering the pricing strategy and customer success strategy is worth trying to incorporate negative churn into the startup you're working on."

Future Level Churn Rate Analysis: Who is the Person and What is the reason

On a high level, a churn analysis is simply analyzing the rate of loss customers.

However, don't stop there. Your churn rate just provides the information, not the why and the whom. To really understand and do something about churn you'll have to understand the reasonspeople are leaving and the users you're losing.

SaaS growth expert Fred Linfjard suggests a combination of quantitative and qualitative data analysis to determine who's producing the most data, and why and also how to take action.

Quantitative Data Collection: Website and Product Data

Sample questions to try and then answer

  • Which of the user groups is more likely to be churning?
  • Do they have patterns in their use of products?
  • What documentation for support did they review prior to the churning process?

The Qualitative Data Gathering Method such as exit interviews and surveys

There are many questions to be tried and answered:

  • What made them leave?
  • What would make them reconsider?

Hope this provides you with the understanding of how churn is impacting your business. Next, let's look at ways to come up with a churn-reduction strategy.

Part 2: Five Tested Strategies to Reduce SaaS Churn

Ideally, your churn prevention plan is based on the quantitative and qualitative studies that you've conducted as soon as you understand who's churning and why, it becomes more straightforward to decide which strategies will have the biggest influence. It's also useful to find out what other companies have done which has been successful.

1. Update Your Dunning Management System

It's common to find 20 % to 40% of customer churn to be voluntary: the result of expired cards, issues with the authorization of transactions, etc. Fred Linfjard discusses why making certain you've got an effective dunning system should be your primary goal when fighting against churn.

2. Show Value as Quickly as Possible

To prevent churn, it starts at the beginning of the customer's journey and an especially critical time is during the onboarding process.

It's obvious how crucial it is to ease the process for SaaS customers to get started. If the user experience isn't smooth at the start and they're frustrated, they won't continue using the service.

There's been more talk about the importance in providing "quick results." According to Lincoln Murphy explains, " Customers who realize their value in a short time are the ones who stay with the company for the longest time."

There are a variety of methods to create quick wins in the software it self. But it's also something you can accomplish more easily through emails.

When Christoph Engelhardt worked for Moz He was able reduce the monthly churn rate of new users by 40% by sending an email that showed the importance Moz was providing to its customers in the initial thirty days. He describes the method which he employed in an extensive blog post.

3. Look for Red Flag Metrics

Search the product behavior of customers who have been churned to find patterns. Such behaviors could indicate that your customer may be in danger of churning.

Groove, which is a shared email inbox that is designed for business, reduced churn by 71 percent using this analysis of data. Groove's team compared the product utilization between the new users who had churned prior to 30 days, and the ones who stayed. They found that the users who churned had much shorter first sessions and less frequent logins than those who were on for the first thirty days.

4. Customize Your Cancellation Offers

The most common strategy for reducing churn is to automate sending an offer to users who decide to end their subscription regardless of whether it's a discounted rate or the possibility of a pause in the subscription, or something else.

The Wavve social media tool specifically designed for podcasters could reengage over 30% of the users who pressed the cancel button. This was done by adding an option at the end of a brief cancel survey.

The strategy was successful because attaching the offer to the cancellation questionnaire allowed the Wavve team to tailor the offer based on why a user was canceling.

5. Automate What's Working, including collecting feedback

Once you've reduced churn, what can you do to keep it at a consistently lower rate?

You keep collecting feedback through an automated process.

The cancellation survey lets you to continue collecting feedback to stay on top of what is making customers churn. "You can streamline or automate your qualitative feedback collection and at this point determine the reasons why your customers quit you. In most cases, an exit survey would be sent out to a person who cancels, either via an email or maybe even after they click"Cancel. If you can automate that collecting, you'll continually provide feedback to you, so you don't have think about it," Fred explained in our interview.

As your product and customers change, so will the reasons they churn. Continuing to evaluate feedback is essential to keeping a low rate of churn.

In addition, by automating the process of collecting feedback, it allows you for other work.

Part III of the course: Churn Definitions and Additional Resources

What Is Churn?

Customer churn, sometimes referred to as attrition of customers, refers to the loss of users for a service or product. It's the opposite of customer retention.

What is the average SaaS Churn Ratio?

There is no consistent average turnover rate for SaaS. Per multiple studies, the average churn rate could vary between 10 up to 60% based upon the scale of the company and its market.

Churn and Retention KPIs to Follow

In addition to the monthly and annual churn rates, additional SaaS metrics that can provide a more complete picture of customer churn and retention include:

  • Net retention rate based on dollar (NDR)
  • Customer lifetime value (CLV)
  • Monthly regular income Churn (MRR churn) as well as annual the recurring revenue churn (ARR churn)

What Can Help